Move to make more bank capital available for small businesses, help address NBFC refinancing needs, prop up the rupee
Amid persisting concerns in the government over a liquidity squeeze in the non-bank lenders (NBFC) segment and its adverse effect on the financing of small businesses, the Reserve Bank of India on Monday announced further easing of the hedging norms for external commercial borrowings (ECBs).
According to a circular issued by the central bank, for ECBs of maturity period between three-five years, the mandatory hedging requirement will now be 70%, instead of 100%. Also, for such ECBs already raised, the existing hedges would be required to be rolled over only to the extent of 70% of the outstanding amount.
The move could let Corporate India, especially the larger companies and banks, raise foreign debt under more competitive terms, in turn making available more domestic bank capital for small and medium businesses and enabling stronger banks to address the refinancing needs of NBFCs. The RBI’s decision would serve to reduce the hedging cost of companies. Higher ECB inflows could also lead to further strengthening of the rupee (the domestic currency had gained as much as 220 paise in the seven trading sessions before a marginal fall on Monday).
On November 6, the RBI had reduced the minimum average maturity requirement for ECBs in the infrastructure space to three years from five years earlier. Additionally, the average maturity requirement for mandatory hedging was reduced to five years from 10 years.
Although the RBI had maintained there wasn’t any serious liquidity problem in the NBFC space, thanks to prodding by the government, it has lately taken many steps to ease the credit flow to the segment.
It announced partial credit enhancement, change in concentration limits etc. in order to allow banks to invest more in NBFCs. But the government reckons that the NBFCs would need to be able to raise more funds for their continued growth and being able to boost consumption demand. Economic affairs secretary Subhash Chandra Garg told FE recently: “The traditional ways NBFCs were financing themselves have to change. The commercial papers route has got reduced substantially… Our sense is still that we need to do something more for some more time (to improve NBFC liquidity).”
In recent months, the cost of borrowings in markets abroad has gone up, partly because of the spike in interest rates in the US and also because the spreads have widened, especially for companies in the emerging markets. In September, ECB borrowings totalled $1.7 billion, far lower than the $4.8 billion raised in August. In July, the borrowings were $2.2 billion.
Having breached a record low of 74 against the dollar recently, the domestic currency strengthened for seven sessions amid softening oil prices globally, before falling again on Monday by 18 paise to close at 70.87. Still, the rupee has lost around 11% in 2018, having emerged as one of the worst-performing currencies in Asia.
Bank credit had registered an year-on-year growth of 11% in year to September-end.
On October 3, the RBI had announced liberalisation of the ECB policy for public sector oil marketing companies (OMCs) for working capital purposes, wherein, the three OMCs could borrow up to $10 billion subject to conditions. Under the earlier policy, ECB could be raised for working capital purposes from direct and indirect equity holders or from a group company, provided the loan was for a minimum average maturity of five years.
Under the revised provision, OMCs can raise ECB for working capital purposes with minimum average maturity period of 3/5 years from all recognised lenders under the automatic route.
ECBs are commercial loans – bank loans, securitised instruments, buyers’ credit, suppliers’ credit, foreign currency convertible bonds etc, raised by resident entities from recognised non-resident entities.